Series 66 Chapter 5 Investment Vehicle Characteristics

Municipal Bonds: What are the risk associated with Municipal Bonds?

1) Credit (Default) R sk --Some municipalities have defaulted in the past 2) Inflation Risk 3) Possible Alternative Minimum Tax on SOME REVENUE BONDS

US Government Agency Debt: 1) what are the two Government Agency Debt that issue NON-Mortgage backed debt? 2) Taxation? 3) What are the benefits?

1) Federal Farm Credit Bank and Federal Home Loan Bank (FHLB) 2) Pay ONLY Federal Taxes not State and Local Taxes. 3) Pay ONLY Federal Taxes not State and Local Taxes - Very Safe

OTC vs. NYSE: 1) Securities prices are determined by: 2) Regulated by: 3) Broker/Dealers must register with: 4) Location of Trading:

1) OTC = Negotiated vs NYSE = Auction Bidding 2) OTC = FINRA vs NYSE = NYSE 3) OTC = Both SEC & FINRA vs NYSE = Both SEC and Exchange Members 4) OTC = No central location, all over the country over the phone, over computer networks and in trading rooms versus NYSE = NYSE Floor

Does the insurer guarantee the cash value in a whole life policy? Does the insurer guaranteed the cash value in a Universal Life policy?

1) True. In a Whole Life policy the insurance company places the cash value into a General Account they control and make the investment decisions into low risk investments. Thus the Insurer is able to guarantee the policy's cash value and the non-forfeiture options that are based on that cash value. 2) No. Due to flexibility option on Death Benefits and Premiums, they cannot guarantee since reducing a premium may result in a lapse of premium payment.

1) What type of Life Insurance allows a Policy Loan? 2) What type of Life Insurance allows a Cash Withdrawal?

1) Whole Life, Universal Life 2) Universal Life

Market makers are involved in the trading of all of the following EXCEPT: A) preferred stocks. B) new issues. C) common stock. D) municipal bonds.

Answer is B. New issues are originally sold in the primary market.

If interest rates decline sharply, which of the following bonds is likely to appreciate the most? A) 15-year zero coupon bond trading on a 7.80 basis B) 15-year 8% bond trading on a 7.90 basis C) 15-year 8% bond trading on an 8.10 basis D) 15-year 7% bond trading at par

Answer: A Prices of zero-coupon bonds tend to be more volatile than prices of interest-bearing bonds because of their longer duration.

Which of the following debt instruments generally present the least amount of default risk? A) Municipal revenue bonds. B) Municipal general obligation bonds. C) High-yield corporate bonds. D) Convertible senior debentures.

Answer: B Because the full taxing power of the municipality backs a general obligation municipal bond, it will exhibit the least amount of default risk. A corporate debenture is an unsecured bond with a greater degree of risk, as is a junk or high-yield corporate bond.

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the principal value of the bond at the end of 5 years? A) $1,440. B) $1,219. C) $1,000. D) $1,200.

Answer: B In addition to paying interest, a TIPS bond increases its principal value semiannually by the amount of inflation. If the inflation rate is 4% for 5 years, the principal value of the bond increases semiannually by that inflation rate. Allowing for compounding, the best choice would be the $1,219. This is computed by multiplying $1,000 by 102% 10 times.

With respect to safety of principal, of the following investments, the least risky is: A) equity options. B) exchange-listed warrants. C) corporate AA debentures. D) common stock.

Answer: C The least risky investment listed is the corporate debenture because, as a debt instrument, it has priority over the others.

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check? A) $17.50. B) $35.00. C) $42.66. D) $21.33.

Answer: D The semiannual interest of a TIPS bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the 5-year term, it has grown to $1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75% (remember it is a semiannual check).

Corporate Bonds: What are the risks associated with Corporate Bonds?

Credit and default risk: Varies significantly from bond to bond and is sometimes hard to determine. Liquidity risk: Many corporate bonds are illiquid, making it hard to find a buyer if you need to sell your bond. Interest rate risk: If interest rates rise, the value of a corporate bond on the secondary market will likely fall. Event risk: Mergers, acquisitions and other tumultuous events can have a negative impact on a bond issuer's ability to pay its creditors.

Which of the following issues is most affected by credit risk? A) preferred stock. B) corporate zero-coupon bonds. C) common stock. D) debentures.

Credit risk is the risk of default, found only with debt instruments. Although debentures are issued strictly on the issuer's credit rating, they have the advantage over any zero-coupon bond in that interest payments begin approximately six months after issuance while in a zero-coupon bond, nothing is paid until maturity date.

REITS: How is Dividends taxed?

Dividends are not considered qualified for purposes of the 15% Maximum tax rate and are taxed at full ordinary income rates.

What type of Municipal Bond has lesser amount of default risk

General Obligation Bond

Municipal Bonds: What are the two types of municipal bonds?

General Obligation Bond and Revenue Bond

What type of investment objective would be appropriate for a REIT?

Income and Growth

What is the single most distinguishing characteristic of universal life?

The fact that premiums are flexible and not fixed.

The MNO Manufacturing Company, headquartered in Springfield, has just filed for bankruptcy. Under federal bankruptcy law, which of the following would have highest priority with the bankruptcy trustee? A) Employee wages earned within the 180 days prior to the bankruptcy filing B) Property taxes owed to the city of Springfield C) Holders of mortgage bonds D) Holder of first lien, senior preferred stock

employee wages as long as the wages were earned during the 180 days prior to the bankruptcy filing, and certain taxes.

Fixed Indexed Annuity: How does the Point-to-Point crediting method work?

with the point-to-point method, the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term.

Bonds: 1) What does the bond trading at premium or discount mean?

- If a bond trades above par, it is said to trade at a premium. - If a bond trades below par, it is said to trade at a discount. For example, if the bond you desire to purchase has a fixed interest rate of 8 percent, and similar-quality new bonds available for sale have a fixed interest rate of 5 percent, you will likely pay more than the par amount of the bond that you intend to purchase, because you will receive more interest income than the current interest rate (5 percent) being attached to similar bonds.

Municipal Bonds: How would you describe the level of risk associated with a Municipal Bond?

- Safe. The safety of principal of municipal bonds is second only to that of government issues.

Zero Coupon Bonds: In what type of scenario would a Zero-Coupon Bond be recommended?

- The Zero-Coupon gives the investor the advantage of knowing the rate of return before investing. Thus, it's useful when there is a target goal, such as College Education or Retirement. - To add onto advantage 1 for retirement, if the funds are held in a tax-sheltered product, you avoid the phantom income

Which type of Life Insurance Plans offer Death Protection and Cash Value?

- Universal Life - Variable Life - Whole Life - Variable Universal Life -A term policy provides life insurance only with no savings element.

How does Variable Life insurance differ from Whole Life insurance?

- Who controls the investment decisions of the sub-account and as result who is assumes the investment risk. 1) Whole Life - premiums are invested into insurance company's general account which they control the investments and assume the investment risk (Thus WL is guaranteed) versus 2) Variable Life - Premiums are not invested into the insurance company's general account, but SOME of the PREMIUM is held in a separate sub-accounts that are controlled by the investor (allowed to invest in common stock, bonds, money markets, and so on.) As a result the Investor assumes the investment risk and is cash value is (Variable = NOT GUARANTEED), but do have the minimum guaranteed death benefit feature.

What's the main difference between the Whole Life Insurance and Universal Life Insurance regarding structure of death benefit?

- Whole Life death benefit payable is the face amount of the policy which remains constant throughout the policy's life versus - Universal Life Death benefit is flexible and can be adjusted by the policy holder to fit the needs by reducing or increasing.

Municipal Bonds: What are the two benefits of Municipals Bonds

1) A SAFETY rating SECOND to US Government Securities 2) Tax Free Income (Especially beneficial to those in HIGHER Tax Bracket.

OTC Market Maker: What are the responsibility of the Market Maker?

1) A market maker must stand ready to buy and sell AT LEAST the minimum trading unit, usually 100 shares, in EACH STOCK in which they have published a bid or sell quote. - They act in the capacity of a DEALER.

Deduction from the Premium: 1) What type of charges are deducted from the GROSS Premium: 2) Are there different options for deducting the sales charge from the GROSS Premium?

1) Administrative Fee: Usually a one-time charge 2) Sales Charge: max allowable charge is 9% of premium per year over a 20 year period. 3) State Premium Taxes (if any) 2) Yes. You can elect a Front-End Loaded sales charge which is 50% of the first year's premium

Exchange Traded Fund (ETF): 1) What are the benefits of ETF?

1) Allows a client to diversify their assets based on an index. 2) Low Fees and Expense are typically lower than those of Mutual Funds. - Please Note: Generally not competitive with a NO-Load Index Fund. 3) Can be Tax Advantages to owning ETF 4) ETF can be purchased on Margin and SOLD SHORT just like any stock.

Exchange Traded Fund (ETF): 1) Describe the ETF?

1) An ETF is a type of fund invests in a SPECIFIC INDEX, such as the S&P 500. They're traded on the exchange so there a liquid product. Any class of assets that has a published index around it and liquid can be made into a ETF: Real Estate, Commodities, Stock and Bonds.

What are the four important things to remember about REITS?

1) An owner of REITS holds an undivided interest in a pool of real estate investments 2) Most REITS trade on Exchanges or Over the Counter 3) REITS are not Investment Companies 4) REITS offer dividends and gains to investors but Do NOT pass through losses as a DPP so its not considered a DPP

Variable Life Insurance Policy: List the frequency of certain calculations associated with VLI: 1) Death Benefits: 2) Sub-account value 3) Cash Value

1) Annually 2) Daily 3) Monthly

Open-End versus Closed End Investments: 1) Price is set by Supply and Demand? 2) Trades in the Secondary Market? 3) Country Funds? 4) Value of Shares are based on the NAV? 5) NAV is calculated weekly 6) May be diversified or non-diversified? 7) Does not trade in the secondary market and share must be redeemed? 8) Professional management 9) Registered as investment companies under the IA Act of 1940?

1) Closed End Investments 2) Closed End Investments 3) Closed End Investments 4) Open End 5) Closed End Investments 6) Both 7) Open End 8) Both 9) Both

Universal Life Insurance: What are the two types of Universal Life Interest Rates?

1) Current Annual Rate: UL pay an interest rate which IS NOT a Fixed Amount or Guaranteed Amount, but varies each year. The interest rate is recalculated each year based on the current interest rate. - The purpose for the varying interest rate is to keep up with higher interest rates being offered during inflationary periods. 2) Contract Rate - Is the Minimum Guaranteed Interest Rate, and the policy will NEVER PAY less than that Amount.

What's the tax status: 1) Common Stock 2) Preferred Stock 3) Bonds

1) DIVIDENDS and Long Term Capital are taxed at a rate not in excess to 15% 2) DIVIDENDS and Long Term Capital are taxed at a rate not in excess to 15% 3) Taxable as Ordinary Income in most cases.

Open-End Investments: What are the risks associated w/ Mutual Funds?

1) Even though Mutual Funds offer the protection from large losses, there's still Market Risks associated w/ Equity Funds and Interest Rate Risk associated with Bonds Funds - Reminder Bond Funds don't have a maturity date so they don't pay principal back at maturity 2) Fees and Expense - Administrative Fees = 12b-1 fees - Highest Fee (May not exceed .75% and can include an additional $.25% servicing fee - Sale Charges - Redemption Fees

Municipal Bonds: 1) Describe the GO Bonds 2) What are the types of GO Bonds

1) General Obligation Bonds are backed by Pledge of the Issuer's FULL FAITH and CREDIT for prompt payment of Principal and Interest. - Described as VERY SAFE, SAFER than Revenue Bonds. 2) City, County and School Bonds - These bonds are secured by a Pledge of UNLIMITED AD VALOREM (PROPERTY Taxes). Basically are backed by the issuer's ability to tax.

1) What is Gold and Commodities used to hedge against? 2) How does Real Estate perform in a market facing deflation or a downward market?

1) Gold, and most other commodities, are a hedge against inflation, not deflation 2) In "down" times, real estate, both residential and commercial, usually underperforms.

What's the Risk-Return Trade Off:: 1) Common Stock 2) Preferred Stock 3) Corporate Bonds

1) High Risk and Return 2) Moderate Risk and Moderate Return 3) Low Risk and Moderate Return - Junk Bonds (BB, Baa, or lower)

Bonds: 1) How are bonds normally issued?

1) In multiples of $1,000, also known as a bond's face or par value.

Deduction from the Premium and Separate Account: 1) What does this mean?

1) Insurance companies charge fees and expenses associated with Life Insurance policy that can be accessed against both Premium and Separate Accounts.

Fixed Annuity: 1) Provide a general description how a FA works? 2) What type of product is a Fixed Annuity considered? What type of license is required?

1) It pays a fixed rate of return for the life of the annuitant. - No Fee - No Riders 2) Insurance Product - A salesperson must have a Life Insurance License of Security License to sell fixed annuities

OTC Markets: 1) Describe the OTC Market? 2) OTC = ____ securities 3) What type of securities are sold on the OTC markets?

1) It's a NEGOTIATED MARKET where Registered Market Makers compete to post the best bid and ask prices. This Inter-Dealer Network that allows Broker/Dealers all over the country trade over the phone, over the computer network and in trading rooms. 2) OTC = Unlisted Securities 3) Stock, Bonds,and ALL Municipal Bonds and US Government

NYSE = ____ Securities = prices determined by ____ OTC = ____ Securities = prices determined by ____

1) Listed Securities and Price Determined by AUCTION. 2) Unlisted Securities and Price Determined by NEGOTIATION.

Deduction from the Separate Account: 1) What type of charges are deducted from the NET Premium:

1) Mortality Risk Fee - The risk the insure may live for a period shorter than assumed. 2) Expense Risk Fee - The risk that the costs of administering and issuing the policy may be greater than assumed. 3) Investment Management Fee

Municipal Bonds versus Corporate Bonds: If a Municipal bond and Corporate Bond are rated the same quality: 1) who generally has the higher coupon rate? 2) who is generally considered the safer/least risky?

1) Municipal bonds generally carry lower coupon rates than corporate bonds of the same quality. 2) Municipal bonds are generally considered second only to treasury instruments in relative safety

1) Does the deduction from the sub-account reduce the amount of money invested into the sub-account? 2) What does the deduction from the Gross Premium do?

1) No. Deduction from the sub-account normally reduces the investment return payable to the policy holder 2) Deduction from the GROSS Premium will reduce the amount of money invested in the separate account.

Fixed Annuity: 1) Are Principal and Interest considered a risk?

1) No. Principal Return and Fixed Income payment is guaranteed. 2) A fixed annuity risks loss of purchasing power because of inflation.

US Government Agency Debt: Federal National Mortgage Association 1) Describe the product? 2) What are the benefits? 3) Taxation?

1) Once government owned corporation, now privately owned corporation who is considered the moral obligations of the US Government. They're mortgage backed bonds that can be purchased by investors 2) - Very Safe - Offered at Par Value with a Semi-annually Interest Rate - Pay higher interest rate than Treasury Securities 3) Taxation at Federal, State and Local Level.

US Government Agency Debt: Government National Mortgage Association 1) Describe the product? 2) What are the benefits? 3) Taxation?

1) Only Government Agency Debt backed by the full faith and credit of the Federal Government. FANNIE MAE Is Not. - They're known as modified pass-through certificates. The term pass-through is used because as the homeowners make their monthly mortgage payments, those payments are collected in the pool and passed to investors - Minimum Denomination of $25,000. - Payments are pass-through investors on a MONTHLY Basis which include both INTEREST and PRINCIPAL payments 2) - Very Safe - Payments are Monthly not Semi-annually - Pay higher interest rate than Treasury Securities 3) Taxation at Federal, State and Local Level.

What are the risks associated with a REIT?

1) Quality of Business Management: The Investor has no control, so much of the risk associated with REITS lies with the quality of management. 2) Taxation: Dividends are taxed as Ordinary Income. 3) Problem LOANS: a bad loan in the portfolio may cause income and/or capital to decrease.

REITS: What are the benefits?

1) Reasonable Income and/or potential capital appreciation 2) The ability to purchase real estate without having to face the liquidity risks found in direct ownership. 3) Negative Correlation to the general stock market: it means that real estate prices and the STOCK MARKET frequently move in opposite directions.

Municipal Bonds: 1) Describe the Revenue Bonds 2) What are the types of Revenue Bonds

1) Revenue Bonds are payable from the earnings of a REVENUE PRODUCING ENTERPRISES 2) Water, Sewer, Electric or Gas System, Toll Bridges, Airports, College Dorms, and other income producing facility - The interest is serviced (i.e., paid) by the revenue generated from the business that backs the obligation. In the case of a water company, bond holders are paid out of the cash generated from customers paying their water bills

1) Suitability Recommendation: When the economy is headed downward what should be your main concern? 2) Same scenario: Some are even saying that there will be price deflation

1) SAFETY is the imperative and nothing is as safe as US Treasuries 2) SAFETY is the imperative and nothing is as safe as US Treasuries

1) What type of product is an ETF comparable to? 2) What type are product is an ETF legally classified as?

1) Similar to an Index Mutual Fund 2) Legally classified as a UIT, with the rest as Open-End Companies.

Corporate Bonds: 1) Explain what a CALL Risk is? 2) When does an Bond Issuer normally call a bond? 3) If a Bond Issuer calls a bond before maturity, does the client still get paid back the full principal or prorated principal amount?

1) Similar to when a homeowner seeks to refinance a mortgage at a lower rate to save money when loan rates decline, a bond issuer often calls a bond when interest rates drop, allowing the issuer to sell new bonds paying lower interest rates—thus saving the issuer money. 2) For this reason, a bond is often called following interest rate declines. 3) The bond's principal is repaid early, but the investor is left unable to find a similar bond with as attractive a yield. This is known as call risk.

Term Insurance: 1) Provide a description of Term Insurance? 2) What advantage does the least expensive feature offer investors?

1) Term Insurance is protection for a SPECIFIED PERIOD of time, hence the description "Term." Term insurance is considered PURE PROTECTION and is the LEAST Expensive form of life insurance. 2) Its allows a person with a limited income to purchase more coverage than might otherwise be affordable

Whole Life Insurance: 1) Whole Life Insurance Policy offer a death benefit and cash value, which is based on performance of a sub-account. Who controls the investment decisions?

1) The INSURER (INSURANCE COMPANY) The accumulation of Cash Value in a Whole Life policy is known as Cash Surrender Value. The cash surrender value increases each year the contract is kept in place. The money is invested into the INSURER'S GENERAL ACCOUNT that allows the Insurer to invest the money into (bonds, real estate, and mortgage loans.)

1) What is a bid price? 2) What is ask price? 3) What price will be higher?

1) The bid price is the price at which a dealer will buy a security BID = BUY 2) The asked price is the price at which a dealer will sell. ASK = SELL 3) A dealer will always BID a LOWER price to buy a stock than to sell it.

List the Characteristics of Universal Life Insurance:

1) The interest earned by the cash account will VARY, but subject to a GUARANTEED MINIMUM. 2) Offers the policy owner exceptional flexibility in adjusting the premiums, cash value, and death benefit. - when the cash value is sufficient, no premium payment is required. 3) Premiums payments are separated first being paid toward the insurance protection, with the remaining balance being used to build up the cash value (with interest)

NYSE Designated Market Maker: 1) What's the responsibility of Exchange Specialist? 2) When is it appropriate for a Exchange to trade on their own account?

1) The main responsibility of the DMM (Specialist) must maintain an ORDERLY Market and PROVIDE PRICE Continuity. - He fills LIMIT and MARKET ORDERS for the Public - Keep a Stable Market - Maintains a fair and orderly market by buying and selling from their own account ONLY when needed otherwise the DMM should let the public supply and demand set the stock prices . 2) It's the DMM responsibility to ONLY trade on his own account to either STABILIZE or facilitate trading when IMBALANCES in Supply and Demand Occurs. - An example of stabilizing the market would be minimizing price disparities that may occur at the opening of daily trading.

Zero Coupon Bonds: 1) Describe how a Zero Coupon Bond works. 2) What are the benefits of Zero Coupon Bonds?

1) The nominal rate on a zero-coupon bond is ZERO (No Interest Payments, but they're offered at a DEEP DISCOUNT. The Client will purchase at a deep discount $500 and hold to maturity and receive the par value = $1000 (Gain = $500). - Remember Zero-Coupon = NO INTEREST PAYMENT similar to a T-Bill. 2) - ALWAYS issued at a DISCOUNT. - No Reinvestment Risk since its not callable. - Is subject to default risk. 3) - More volatile than other Zero-Coupon Corporate and Municipal bonds and STRIP (Zero-Coupon Treasury Bond) of similar quality. - Unless tax-sheltered, tax on "phantom" income. Form 1099-OID indicating the taxable interest to be reported each year. - That's why this product would be particularly useful in a retirement plan since it avoids being taxed on the phantom income.

Variable Life Insurance Cash Value: 1) How can you determine the cash value of a VLI 2) How do you determine the value of the cash value? Does it involve AIR like the Death Benefit Value? 3) Does a cash value have a guaranteed minimum amount? 4) Can the cash value drop below zero and become negative?

1) The policy's cash value equals the value of investments held in the Separate Account 2) Does NOT include AIR; It's simply based on the separate account performance, so any positive performance will result in a cash value growth 3) No (DB does but not Cash Value) a negative performance can result in the cash value dropping to zero. 4) You CANNOT have a Negative Cash Value balance, but like the death benefit, the cash value may not increase until prior negative performance has been offset.

US Government Debt: 1) Describe a T-Notes? 2) What are the different terms offered?

1) They're considered Intermediate TERM debt obligations of the Treasury. (T-BILLS are debt obligations of the US Gov't - They pay a semi-annual fixed interest rate as a Percentage of the stated par value. - They mature at Par Value (So NO capital appreciation/Growth) 2) They have intermediate maturities (2 years, 3 years, 5 years, 7 years, and 10 years)

US Government Debt: 1) Describe a T-Bonds? 2) What are the different terms offered?

1) They're considered LONG TERM debt obligations of the Treasury. (T-BILLS are debt obligations of the US Gov't) - They pay a semi-annual fixed interest rate as a Percentage of the stated par value. - They mature at Par Value (So NO capital appreciation/Growth) 2) They have long term maturities 10 - 30 years

US Government Debt: 1) Describe a T-Bill? 2) What are the different terms offered?

1) They're considered SHORT TERM debt obligations of the US Government. T-Bills pay NO INTEREST, but are offered at a discount from their par value. For ex. you might purchase a $10,000.00, 26 week T-Bill at a price of $9800. You would receive no interest, but at maturity, the Treasury would send him a check for $10,000.00 2) 4 weeks (1 Month), 13 weeks (3 Months/1 Quarter), 26 weeks (Half Year) and 52 weeks (1 year).

Variable Life Insurance Death Benefit: 1) How is the death benefit structured? Is it guaranteed? 2) Is the Fixed Death Benefit considered Fixed?

1) Trick Question: VLI death benefit consists of two parts: - Guaranteed Minimum Value provided by the portion of the funds invested in the General Account (controlled by insurer) - Variable Death Benefit provided by the portion of the funds invested in the sub-account (controlled by investor) 2) Once again it's a trick: At the opening the contract the guaranteed minimum is calculated and does not change, but the TOTAL BENEFIT, including the variable portion of the death benefit, must be recalculated at least ANNUALLY.

1) Why can't a UL claim to offer guaranteed death benefit? 2) What type of UL was created as a result to offer guaranteed death benefit?

1) UL feature allows for the flexibility of premium payments which may cause a policy to lapse requiring additional premiums to be paid. 2) Most Insurers today offer a Guaranteed Death Benefit Universal Life where the policy is guaranteed not to lapse if the sum of the premiums paid is greater or equal to the minimum monthly premium required.

Variable Life (VLI) versus Universal Life (UVL or VUL): 1) Scheduled Premium 2) Fixed Death Benefit: 3) Premiums to General Account 4) Guaranteed Cash Value

1) VLI = Scheduled Premium v. UVL = Flexible Premium 2) VLI = Minimum Guaranteed Plus Variable Cash Death Benefit versus UVL = Variable Death Benefit 3) VLI = Premiums to General and Separate Account versus VUL/UVL = Premium to Separate Account 4) BOTH VLI and UVL = NO guaranteed cash value

When it comes to how interest rates affect bond prices, there are three cardinal rules:

1) When interest rates rise—bond prices generally fall. 2) When interest rates fall—bond prices generally rise. 3) Every bond carries interest rate risk.

Corporate Bonds: 1) What are the four reasons you'd include corporate bonds in a portfolio?

1) With Highly Rated Bonds - Safety of Principal. 2) Steady flow of interest - The reason why people buy bonds is to for the protection of principal and income stream. 3) Fixed Maturity Dates (you know when the bond matures and when the money is coming back) 4) Highly speculative bonds - Possibility of very high income.

Based on the capital structure of corporations, what is liquidation priority? Please list them order highest to lowest

1. Secured (collateralized) bondholders 2. Unsecured bondholders 3. Holders of subordinated debt 4. Preferred stockholders 5. Common stockholders

If a question on the exam asks which issue is most affected by credit risk what should be the first question to ask?

1st) What products are Debt Securities 2nd) What issue has longest time to maturity and longest time to paying interest.

Corporate Bonds: Provide a general description.

A bond is a loan an investor makes to a corporation, government, federal agency or other organization in exchange for interest payments over a specified term plus repayment of principal at the bond's maturity date.

Bonds: What is a bond coupon? How can you tell a bonds coupon rate?

A bond's coupon is the annual interest rate paid on the issuer's borrowed money, generally paid out semiannually. For instance, a bond with a par value of $1,000 and an annual interest rate of 4.5 percent has a coupon rate of 4.5 percent ($45)

What do Market Makers/Exchange Specialist act in the capacity as?

A specialist is a DEALER on the NYSE who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks.

Your client has been saving for the purchase of a home. She calls to tell you that her bank CD matured and she is not pleased with the renewal rate offered by the bank. The client plans to purchase the home within the next 9-12 months and will probably need these funds for the down payment. Which of the following would be the most suitable recommendation? A) Treasury bills. B) Large-cap stock. C) Growth stock. D) Public utility stock paying liberal dividends.

Answer: A When customers need access to funds within a short period of time, their primary consideration is liquidity. The most suitable investment recommendation for this client is US Treasury bills, which are highly liquid and safe. In addition, recommending investments in stocks that carry market risk to a client who traditionally purchases bank CDs may not meet the client's nonfinancial considerations.

For a given amount of principal, which annuity option would produce the largest monthly income stream? A) Joint and 100% survivor. B) Joint and 50% survivor. C) Straight life. D) Life with term certain.

Answer: C This is just an example of the risk/reward philosophy. Taking payments for life only (which can end rather suddenly) exposes the annuitant to greater risk than period certain and joint payout so the rewards are higher.

A bond issued by the GEMCO Corporation has been rated BBB by a major bond rating organization. This bond would be considered: A) a high-yield corporate bond. B) secured. C) callable. D) an investment grade corporate bond.

Answer: D An investment-grade bond has a bond rating between AAA and BBB. Lower-rated bonds are considered high-yield bonds and are often referred to as junk bonds

Variable Life Insurance Death Benefit: Annually the Total Death Benefit is recalculated: 1) Under what scenario would the death benefit increase? 2) Under what scenario would the death benefit stay the same? 3) Under what scenario would the death benefit be zero?

Assumed Interest Rate (AIR) = Minimum Guaranteed Amount = Amount invested in the insurer's general account. 1) When the separate account performance are greater than the assumed interest rate (AIR). 2) When the separate account performance matches the assumed interest rate (AIR) 3) NEVER. When the separate account performance is less than assumed interest risk (AIR) the contract may decrease but NOT below the minimum amount guaranteed.

Revenue Bonds vs. GO Bonds: What bond is considered safer and more secure?

Generally GO Bonds, but Revenues have built up a good record over the long period of time and are sometime rated higher than GO.

What type of fund produces highest current income than other funds.

High yield (junk) bonds, although carrying more risk, produce higher current income than other funds.

A client has indicated that his primary objective is maximizing current income regardless of the risk. Which of the following mutual funds would probably be most suitable for achieving that goal? A) DEF High Yield Bond Fund. B) ABC Growth and Income Fund. C) GHI Index Fund. D) JKL Municipal Bond Fund.

High yield (junk) bonds, although carrying more risk, produce higher current income than other funds. More than Income Funds and Growth & Income Fund

Say you bought a 10-year, $1,000 bond today at a coupon rate of 4 percent, and interest rates rise to 6 percent. What will happen if you have to sell before maturity?

If you need to sell your 4 percent bond prior to maturity you must compete with newer bonds carrying higher coupon rates. These higher coupon rate bonds decrease the appetite for older bonds that pay lower interest. This decreased demand depresses the price of older bonds in the secondary market, which would translate into you receiving a lower price for your bond if you need to sell it. In fact, you may have to sell your bond for less than you paid for it. This is why interest rate risk is also referred to as market risk.

Fixed Indexed Annuity: How does the Annual Reset crediting method work?

In the annual reset index method, interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term.

Investors seeking higher income may be interested in mortgage-back securities. To prepare a cash flow analysis on these, the most important factor is:

Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature.

When is appropriate for DMM to buy and sell, as a dealer, stock from their own inventory?

ONLY when a need for such intervention exists. Otherwise the DMM should let the public supply and demand set the stock prices. - Stabilize the market by minimizing price disparities or when an imbalance in supply and demand occurs

What's an easy acronym for remembering the Fees deducted from the PREMIUM or GROSS PREMIUM?

S = Sales Charge A = Administrative Fee S = State Premium Taxes

Describe a Universal Life Insurance:

The Universal Life insurance is similar to the whole life insurance in aspect that it offers the Death Benefit (Face Amount to be paid to Bene at death) and Cash Value (Pays an Interest Rate). The UL was created to address the inflation risk associated w/ WL policy who offered low interest rates (3-5%) but became unattractive during times of inflation (higher interest rates being offered) so they created the UL to recalculate/adjust the interest rate based on the current interest rate being offered to keep up w/ inflation.

What advantage does someone get when purchasing Revenue Bonds have over GO Bonds

The Yield, generally, is higher for this type of bond than for a GO

How much will the annual interest rate be for a UL using this example? If the guaranteed contract rate is 5% and the current rate is 8%, the cash account would grow by the higher 8% but what if the current rate falls below 5%?

The account will still grow by the minimum rate of 5% during the year.

Based on looking at the rating of a corporate bond, how can you tell its a secured bond?

The bond may or may not be secured: the rating does not indicate that fact.

Municipal Bonds: What's the tax status?

This is an unique characteristic of Municipal Bonds. Interest received by investors is FREE of any Federal income tax and in the case of bonds IN THEIR STATE OF ISSUANCE generally are free of State Income tax as well - REMEMBER: Tax-FREE of Federal Income tax and State Income Tax (for bonds in their state of issuance)

What is a block trade?

Trades of 10,000 shares or more are known as block trades.

A client has a TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return? A) -0.50% B) 4.00% C) 7.50% D) 3.50%

Treasury Inflation Protected Securities (TIPS) adjust the principal value each 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.

How would describe the Universal Variable Life Insurance? - Who controls the decision making of the cash value? - Is the Death Benefit fixed or flexible? - Is the Death Benefit guaranteed?

Universal Variable Life Insurance = Premiums are invested in separate accounts and the death benefit is only variable (not guaranteed/fixed). The reason its considered variable is the insured (client) has the option (FLEXIBILITY) to Increase, Skip or Reduce his premium payment, though must maintain a minimum cash value, and the death benefit is adjusted appropriately based on insured decision using the flexibility feature.

Fixed Indexed Annuity: How does the High Water Mark crediting method work?

Using the high-water mark the index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date the annuity was purchased. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term.

Is Common Stock exposed to Credit Risk

When one invests in common stock, there is no credit risk because there is no credit - stock is equity, not a debt. Debt Securities = Credit Risk, Inflation Risk, Interest Rate Risk, Business Risk, Reinvestment Risk More Importantly: CREDIT RISK = Debt Securities Equity does NOT have CREDIT RISK, but do have BUSINESS RISK

Zero Coupon Bonds: 1) What type of Zero Coupon Bond is only type of this bond not subject to No Credit Risk?

Zero-Coupon Treasuries Bonds (STRIP) it's fully backed by US Government Security.